Arena Pharmaceuticals (NASDAQ:ARNA) is slated to be one of the presenters at the Jefferies 2014 Global Healthcare Conference on June 3rd, 2014. Normally, a pharmaceutical company presenting at a conference is not really a market moving surprise, but there is potential that this particular presentation could be different. The main reason is that the conference falls almost exactly on the 1 year anniversary of the launch of the anti-obesity drug Belviq. A secondary reason is that Jefferies analyst Thomas Wei has been one of the more bullish analysts on Arena and carries a $12 price target that was reiterated last November.
Just over a year ago (May 3, 2013), Wei published a report where he lowered his price target from $14 to $12 and outlined his sales estimates. That report also included what was termed an upside scenario where the price target was $33, and a downside scenario with a price target of $3. What most retails always hear is the $12 target and the $33 upside. Very rarely do you see the downside discussed.
The $12 Target Thesis
The $12 target established by Wei was based on the thesis that Belviq could be positioned as the safer obesity drug and that the drug was likely to capture significant market share. The analyst assumed "modest" initial sales but was excited about a combo pill utilizing phentermine. His estimates were that the combo could generate $2 billion in sales by 2020.
The $33 Upside Scenario
The $33 upside scenario was based on Belviq sales showing a "much faster launch trajectory than their assumption as a monotherapy through 2014". It also relied on higher combo sales and additional marketing territories.
The $3 Downside Scenario
This was based on Belviq seeing "limited traction due to market competition" and that Belviq + Phentermine is not widely adopted.
The Wei report estimated net Belviq sales in 2014 to be about $34 million with a modest portion of that being assigned to other countries. As most investors know, there were no other countries that approved Belviq in 2013. The assumption was that Belviq sales revenue to Arena would be about $10.7 million.
If net sales were estimated at $34 million, the gross sales number would have needed to be about $60 million. Gross sales came in at about $28 million.
For 2014 the Thomas Wei estimate was for net sales to be at about $85 million. This would imply gross sales of $150 million for the year, and a combined $210 million since launch.
My projections for equity appreciation and a $10 price target are that the sales need to come in at the $150 million mark in 2014. That would imply overall sales of about $180 million since launch.
For some perspective, the current pace for Belviq sales shows a path to 2014 gross sales of about $100 million. This is shy of the $150 million I see as the catalyst for a $10 price target in 2014, and shy of what Thomas Wei outlined last year.
In looking at the Thomas Wei expectations for 2013 and 2014 from last year's report, it would appear that the 2014 numbers are still a possibility if things ramp up substantially in the second half of the year. We can also see why the equity has not really approached his $12 target. Sales were half of what he expected in 2013, and are currently pacing at a rate that is 33% shy of his 2014 target. Yes, improvement is happening, but what will happen with his estimates after this conference?
If we look further into the Wei projections we see that his 2015 estimate carries net sales at about $337 million. That would imply gross sales of $600 million. This would also trigger a milestone payment and revenue share adjustment upward from 31.5% of net sales. In essence, Wei was looking at 2015 as being the "breakthrough" year for Belviq.
I certainly can not speak for Thomas Wei, but I can surmise that his projections (particularly the 2015 and beyond) will likely see either a significant adjustment in time-frames, or he will take a track that the close of 2014 and all of 2015 will be banner years for Belviq sales and launch this drug toward stardom. My bet is that the assumptions for 2014 will be lowered slightly and that 2015 and beyond will also see significant drops in sales assumptions relating to Belviq.
2014 is about 40% complete and gross sales estimates now stand at about $28.5 million. This would imply that the balance of the year needs to deliver $120 million in gross sales to be on target for 2014 estimates and that 2015 would need to deliver $600 million. For perspective, the next 19 months would need to see gross sales of $720 million to meet the old Thomas Wei model. That is 3,609,000 scripts. That level of sales equates to 190,000 per month, or 47,500 per week on average.
Why do I point this out? Because I highly suspect that the sales models developed by many analysts will change as Belviq sales pass the 1 year mark. As an investor it is better to understand that sooner rather than later.
With all of that being said, there are potential catalysts that exist. These catalysts can be quite nice, but we also need to understand those in the context of sales being the key valuation driver and that many of these catalysts do not offset the adjustments that need to be made on sales models.
Possible catalysts in 2014 include:
- Study results on Belviq and phentermine
- Study results on Belviq as a smoking cessation product
- Positive results on application to Mexico and Canada
- Pipeline progress that is positive.
- Additional territory applications and studies
- Television ads show more traction than we are currently seeing
- Contrave from Orexigen (NASDAQ:OREX) gets denied in June
- Contrave has modest uptake in 2014 if approved
- Insurance coverage gets to 70% and begins to see better tier coverage.
- Belviq somehow goes "viral"
My near term cautionary voice to investors is that it is quite likely that analysts models as they relate to Belviq sales may see substantial adjustments in the near term. If that happens, the news will take some time to be digested by the markets as expectations begin to more closely align with the real world sales pace. There is potential with Arena and Belviq, but investors need to understand that time-frames may get stretched out. Stay Tuned!
Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in Orexigen